Chapter 6

Question 1

Normal good

Answer 1

The demand for both goods increases when income increases, so both goods are normal goods

Question 2

Inferior good

Answer 2

the demand for the good decreases when income increases

Question 3

Income Offer Curve

Answer 3

This curve illustrates the bundles of goods that are demanded at the different levels of income

Question 4

Income Expansion Path (IEP)

Answer 4

Another word for Income offer curve

Question 5

When does IEP have positive slope?

Answer 5

If both goods are normal goods, then the income expansion path will have a positive slope

Question 6

Engel Curve

Answer 6

If we hold the prices of goods 1 and 2 fixed and look at how demand changes as we change income

Question 7

Luxury good

Answer 7

If the demand for a good goes up by a greater proportion than income

Question 8

Necessary good

Answer 8

if it goes up by a lesser proportion than income

Question 9

Homothetic Preferences

Answer 9

Suppose that the consumer’s preferences only depend on the ratio of good 1 to good 2. This means that if the consumer prefers (x1,x2) to (y1, y2), then she automatically prefers (2x1, 2x2) to (2y1, 2y2), (3x1, 3x2) to (3y1,3y2), and so on, since the ratio of good 1 to good 2 is the same for all of these bundles. In fact, the consumer prefers (tx1, tx2) to (ty1, ty2) for any positive value of t

Question 10

An ordinary good

Answer 10

Ordinarily, the demand for a good increases when its price decreases

Question 11

Giffen good

Answer 11

The demand for good decreases when its price decreases.

Question 12

The Inverse Demand Function

Answer 12

measures the price at which a given quan- tity will be demanded. The height of the demand curve at a given level of consumption measures the marginal willingness to pay for an additional unit of the good at that consumption level.